Inflation

This is from the NYT today on the fed’s move to increase the rate paid on reserves:

“If you perfectly telegraph when you’re going to do it, you might as well do it that day, since so much of interest rate and monetary policy is about expectations,” she said. “It doesn’t matter so much what it is, versus what was expected.”

Maybe I’m reading too much Scott Sumner but I am often concerned that it is a point that people completely miss. Even in the context of the article quoted above, the message is about expectations of the interest rate on reserves or the target rate for the discount window, not inflation, which is the expectation that really matters.

I know that insurance companies don’t give a rat’s ass about what the interest rate is. They pay claims, which are governed by prices, which are sensitive to inflation. It is inflation expectations that will drive insurance rates up, which, of course, fuels ever greater inflation. Are the inflation hawks right? God, who knows, but it isn’t as simple as inflation good, all else, bad.

Careful, now.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.